Digital service firm VAT rule change

Almost two thirds of UK small firms, providing digital services such as apps and e-books to consumers in other EU member states, are unaware of the VAT rule changes that will take effect on 1st January 2015.

The new rules make their supplies subject to VAT in consumers’ home countries, rather than in the UK which is currently the case. This lack of awareness was revealed by a survey of 150 digital service providers carried out by KPMG. In contrast, most large digital service firms are fully aware of the changes.

The majority (75%) of respondents would consider increasing their prices by up to 5% to compensate for the additional costs of complying with the new rules, and more than one in five would consider no longer supplying to other EU member states.

The survey also revealed that 75% of respondents were considering raising their prices as a result of these new tax rules. More than half (53%) were predicting price rises of between 2 to 3%, but over a quarter (26%) indicated increases of 5% or more.

Indeed, according to KPMG’s calculations, if affected businesses chose to pass on all the additional costs of complying with these new rules, as well as the uplift in VAT itself, then this would result in a price increase of up to 11% for affected services, particularly those sold to customers in EU countries with the highest VAT rates.

But the changes should be good news for the UK economy which is set to benefit by around £300m. This is because the VAT collected from UK customers will belong to the UK Treasury, rather than to the country where the supplier is established.